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Personal Finances

CD vs Savings Account

CD vs Savings Account: What’s the difference?

With a turbulent stock market providing inconsistent performance at the end of 2022 and now lingering into 2023, there’s renewed interest (no pun intended) in the predictable (and now higher) returns being offered by savings accounts and Certificate of Deposit (CD) accounts. Some of this is structural, based on changes in our economy. As interest rates rise, banks and financial institutions are competing against each other with ever higher offerings.

Knowing the differences between CDs and Savings Accounts can help with selecting the right one for personal preference. Understanding the benefits of one versus the other can also make the difference in returns, flexibility, and timing with respect to accessing your funds.

What is a Certificate of Deposit (CD) and how does it work?

What is a CD and how does a CD work? Typically, CD accounts are deposit accounts that provide a higher return via a higher interest rate. This is especially the case when compared to a standard savings account. This is accomplished by restricting your ability to get your funds while in the CD term. That term can be anywhere between three months and, at extremes, 5 years. Banks interchangeably express the length of the terms in months or years; for example, a CD paying 4% interest for a 60-month term restricts the account holder from removing funds for a period of 5 years.

If you do need access to your funds prior to that period, there’s typically an early withdrawal penalty. To reduce the risk of harming your returns, you can create a CD ladder.

What is a CD Ladder?

A CD ladder entails opening multiple CDs with different terms of length. Shorter term CDs that traditionally pay a lower interest rate are moved into CDs that pay a higher interest rate with a longer term when the shorter terms are completed. In this way, you can consistently have access to your funds, and the rate of growth is comparable to placing all the funds in a longer-term CD.

When deposited at a bank that is insured by the FDIC, the risk of a CD is not lost. The risk involved is earning less than if you had your funds in a higher rate account – this happens when interest rates rise. Conversely, if rates fall while you’re locked into a higher rate CD account, you benefit.

What is a Savings Account?

A Savings Account is a deposit account that earns interest. There’s flexibility with a Savings Account because you can withdraw money at almost any time. Banks typically limit the number of withdrawals you can perform in a specified time. Withdrawal includes bank transfers, sending funds, online/telephone transactions, paying bills and any other method that extracts money from the account. If you pass the threshold or limit for withdrawals, the bank typically charges a fee for any additional transaction – or may restrict you from making the transaction altogether (though that is rare).

With savings accounts, you can access money for nearly any reason, and they’re great for emergency funds without the penalties of CDs. They can also be linked to checking accounts as a source of funds in case the checking account is overdrawn for lack of funds. Note that a charge may be incurred for overdrafts anyway, but the flexibility afforded is a key component of savings accounts.

Savings accounts typically pay a lower rate than CDs and that comes with the advantage in ease of withdrawal. Credit unions and online banks can offer high-yield savings accounts, but their may be restrictions and eligibility considerations when compared to standard banks.

Key Differences in CDs and Savings Accounts

Interest Rates and Earnings

Key differences between CDs and Savings account include:

  • CDs typically offer higher interest rates when compared to savings accounts
  • There’s often no penalty in withdrawing your funds from a savings account unless you are over the number of times you can withdraw.
  • CDs charge a penalty if you withdraw prior to the term completing and the withdrawal penalty tends to eliminate any benefit from the higher interest rate earned.
  • CDs often cannot be used if you overdraft your checking account (this varies and depends on the bank)
  • There’s often a higher minimum opening balance for a CD than a savings account.
  • CD rates are fixed for a term whereas savings account rates fluctuate so it is important to monitor rates.

In Summary

There are marked differences between CDs and savings accounts. Knowing which one is best for you comes down to flexibility with respect to accessing your funds, returns based on interest rates, and the bank where you’re opening the CD/savings account. Amerant Bank offers a wide range of high interest CD products with flexible terms. Our savings accounts also feature competitive rates; get started with an Amerant savings product designed for your needs today.

Editorial Team
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